No one dreams of filing bankruptcy when they grow up. It’s often seen as a last resort and, regrettably, as a failure. So many people are so avoidant to the idea of filing a bankruptcy, that they do not consider speaking to an attorney, even for a free consultation. Instead, there are many alternatives they try first, to a varying degree of success. Here, we will discuss the most common alternatives to bankruptcy that we see our clients try before they come to our office.
1. Modifying a mortgage: If a mortgage payment is the source of struggles, clients often try to “work with” the bank to negotiate their mortgage into something more affordable. Modifying a mortgage is when a lender agrees to reduce the interest rate or principal, tack missed payments onto the end of the mortgage, or extend the terms of the mortgage. Many people find the modification process very frustrating because banks are slow, they lose paperwork, and there is never a clear person who can really help. Often, there is a hope that modifying a mortgage can help avoid a foreclosure, and is the first of many alternatives a person tries, but it is not uncommon that the foreclosure proceeds while the modification is stalled.
2. Asking for a Creditor’s Help: Sometimes, credit card companies provide options and plans that make it easier to pay down a debt. For example, Discover Card may lower the interest rate on a card for 8 months or AmericanExpress may freeze and account and forgive late fees as long as payments of $200.00/month are made. However, no credit card company MUST help a client and, despite the friendly face presented by many credit card companies, a credit card company exists to make money, not be a friend. Often, these assistance problems are short term and are offered to encourage people to pay that company first, allowing the helpful company to be paid while a company with higher demands is not paid. It is very rare that all creditors agree to plans that make it easier for a person to pay all of their bills. Typically, a handful of companies are helpful and all others remain steadfast, resulting in a situation that is still untenable for the unfortunate, but honest, debtor. Throwing yourself at the feet of a creditor is not typically a successful alternative to bankruptcy.
3. Draining Retirement to Pay Creditors: One of the most heartbreaking situations for our potential clients is when they have pulled out all of their retirement to pay off debts and find themselves still in a situation where they cannot pay all of their bills. Often, a medical debt comes along and a client pays it with credit cards. Unable to pay off the credit cards (because interest and fees), the client pulls all of their money out of their 401(k). In taking out their funds, they pay significant penalties, and often end up losing 30-50% before they even start paying their debt, making this one of the alternatives to bankruptcy that is particularly damaging. What is left makes a significant dent in the debt, but does not pay it all off. Three to five years later, the client has no retirement and, because of interest and fees), finds themselves in over their heads again and in our office. Even if the retirement is sufficient to pay off the debt, starting from scratch in building retirement is very difficult and the client’s retirement is no longer growing as much because the principal has been so reduced. It’s even more disheartening because the government thinks it’s so important to save for retirement that retirement accounts are completely untouchable by creditors.
4. Debt Settlement: This is one of the most common Hail Marys. They typically try this in 2 ways: through a debt settlement company OR by themselves. Debt Settlement Companies are, almost without exception, frauds, scams, and damaging to credit. So much so, that every word of this sentence links to a different resource about debt settlement companies being a scam. Not only does settling debt destroy credit, but there are huge tax consequences, risks that a creditor won’t play ball, and many other pitfalls that are important to avoid. Debt settlement companies make BIG money, which is why they spend so much as marketing themselves as THE BEST of the alternatives to bankruptcy, but they often fail to deliver on their promises. The attorneys at Collum & Perry, PLLC have experience helping some clients settle their debts, but debt settlement is done only in very specific, narrow situations.
5. Duck and Cover: Also known as turtling, many people hide from their debts. When the going gets tough, the tough become avoidant! We all know why this is not a good idea, but sometimes people easily pretend that avoiding creditors won’t increase their total debt, kill their credit, and increase their stress in the long run.
6. Buckle down and pay it off: Of all of the options, this is the most viable alternative to bankruptcy for most people. However, people still often fail. Why? Because life is expensive. If someone had to borrow money in the past, for whatever reason, it is unlikely that they will be able to avoid needing money again in the future. Paying off debt, especially large debts that are growing at 29%, can be exceedingly difficult, if not impossible. One reason to see an attorney for a free consultation is so an attorney can offer unbiased advice on whether it would be better to try to pay off the debt. It is not uncommon that Collum & Perry recommends that someone not file bankruptcy and, instead, take certain steps to pay off the debt.
Before you pay anyone to help you pursue a bankruptcy alternative, please speak to an attorney about all of your options. Generally, attorneys are aware of the alternatives to bankruptcy and are happy to discuss the consequences of a variety of choices. Collum & Perry is happy to provide you with the same advice we would give our family members, honestly and clearly, so you can make the best decision.